Mortgage payments are certainly much higher than a few years ago when interest rates were much lower, putting pressure on property owners who still owe big mortgages.
According to ratehub.ca, the best mortgage rates right now are three-year fixed interest rate of 5.94%, three-year variable interest rate of 6.85%, five-year fixed rate of 5.24%, and five-year variable rate of 5.95%. It also recommends getting pre-approval when shopping for a new mortgage so that you can lock in a rate for up to 120 days or about four months.
To potentially soften the blow from high mortgage payments, Canadians can target to make more money from their savings via earning higher interest income and even dividend stocks.
Get high-interest income
Investors can put their short-term cash needs in high-interest savings accounts to make more money while maintaining liquidity. For example, both Simplii Financing and Tangerine are offering promotional interest rates of 6% for five months for their savings accounts.
If you don’t have access to these offerings, you may be able to earn interest rates of north of 5% by locking money in Guaranteed Investment Certificates (GICs) offered by big Canadian banks. Your money might be locked in one year or longer.
Both high-interest savings accounts and GICs are risk-free investments that protect your principal. They are good short-term investments, particularly when you expect interest rates to stay high or go higher.
Invest in dividend stocks
For the long-term capital that you don’t need for at least three to five years, you can consider dividend stocks that can also deliver good income. However, your principal will be volatile. When in doubt, choose stocks that tend to increase their dividends over time over ones that maintain stagnant payouts.
If you trust the GICs offered by big Canadian banks, you should also have confidence in their businesses. Particularly, Toronto-Dominion Bank (TSX: TD) offers a good mix of value, dividend income, and long-term growth potential. Over the last decade, it delivered the second-best total returns among the Big Five Canadian bank stocks by delivering annualized returns of 10.5%. In the past 10 fiscal years, it increased its adjusted earnings per share with solid growth of almost 8.5% per year.
The bank stock has performed weakly since peaking in 2022 at about $102 per share, potentially because economists expect a recession in Canada and the United States by 2024. Currently, investors can buy shares in the quality North American bank with a discount of about 12% from its long-term normal valuation.
At $83.85 per share at writing, TD stock trades at about 10.3 times adjusted earnings. Thanks to a lower valuation, it also offers a higher dividend yield than normal — a yield of close to 4.6%. The bank has increased its dividend over time as well. For example, its five-year dividend-growth rate is 8.7%. Even if it were to grow earnings by a rate of 6%, coupled with its dividend, investors can approximate total returns of north of 10% per year, which would be fabulous in the blue-chip stock.
